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Turkey's Banks: Eyes On The Prize

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These are surely trying times for Turkey. In August, the lira came under unprecedented pressure and trade was threatened by US President Trump’s combative policy stance; Washington doubled tariffs on aluminum and steel and warned more measures might be on the way, prompting Turkey to raise its own duties on a range of US products. By summer’s end, the lira had lost some 30% of its value against the dollar as international investors bruited concerns about the political independence of the Central Bank of the Republic of Turkey.

“It’s too early to jump to conclusions,” says Inan Demir, senior emerging EMEA economist at Nomura Bank. “But clearly the worry is that Turkey is headed for hard landing.”

Yet Turkey’s financial sector has long since learned the value of stepping outside the box, and it is in such times of turmoil that its resilience, adaptability and innovation come to the fore. On September 13, the CRBT raised the key interest rate by more than 600 basis points, from 17.75% to 24%. This rise was more than generally expected—the most in the 15 years of the Erdogan administration—and helped boost confidence on currency, bond and equity markets.

Regarding banks, the sector today bears no resemblance to what it did before the 2001-2002 crisis, when as many as 20 banks were closed down and the entire system of regulation had to be rebuilt.

“Corporate governance is much better than before the 2001 crisis,” says James Watson, MD for Emerging Europe Banks at Fitch Ratings. “Banks can raise sufficient liquidity to meet their foreign debt obligations this year—even in a worst-case scenario of a period of no international markets access.” Watson adds there are signs some banks are already de-leveraging with some institutions looking to curtail loan growth this year in an effort to protect solvency and asset quality. NPLs are still below 3%. As a consequence, domestic confidence in the banks remains strong.

Indeed, many regard Turkish banks as some of the most innovative in the global banking industry, especially in mobile and digital applications. Garanti is a case in point, managing to boost the number of its digital banking customers by almost 1.5 million last year, to just under 6 million, in a year which saw its net income rise some 24% to TL3.3 billion. Akbank saw its net income rise 14% in the first half of 2018 to TL1.6 billion and last year was named one of the world’s most valuable banking brands.

In part, the drive to innovation stems from serving a forward-looking tech-savvy population, half of which is under the age of 30. Some 56% of Turks have used a mobile payment app, which is more than double the rate of France and Germany, according to a study by ING. Turkey was the first country in the world to offer free installment options for credit cards. It was the first country in Europe to offer a contactless card.

There’s government support for financial innovation, too, in particular, for a move toward eliminating cash payments by 2023. The Interbank Card Center of Turkey (BKM), a partnership of 13 public and private Turkish banks, is leading this drive toward a cashless society with products and services such as BKM Express, the world’s first national digital wallet, and TROY, a national card payment system. In addition to payments, Turkey also hosts startups in crowdfunding, robo-advisory, data analysis and other areas.

In fact, Istanbul has emerged as a global fintech center, with Turkish banks collaborating to create a new fintech ecosystem. BKM has established the FinTech Istanbul platform as the umbrella organization to lead the effort and is running a proof-of-concept project for blockchain technology.

Fintech “meetups” will enable the stakeholders in the ecosystem to meet and share information on the platform.

There are already about 200 fintech companies in Turkey, according to a report by Deloitte, and Turkey’s major banks are partnering with them to introduce innovative services. The size of the local market is estimated at $15 billion and is growing at an annual rate of 14%.

The Turkish banking sector’s refinancing needs over the next 12 months amount to $102 billion, Watson explains, but around half of this is from stable sources such as parent and subsidiary banks, and the sector can raise sufficient liquidity to cover the other half, including by driving down placements with the Central Bank.

“We are some way off a full-blown crisis,” says Watson. “Banks can raise sufficient liquidity to meet their foreign debt obligations this year, even in a worse-case scenario of a period of no international markets access, but this would still be a negative scenario for Turkey.”

Local officials have been at pains to downplay concerns, stressing that local banks would not have problems meeting obligations or continuing to extend loans, amidst reports that many Turks were boosting their purchases of local currency in response to Erdogan’s calls to do so. “The share of our non-deposit funds is around 30%,” says Huseyin Aydin, head of the Turkish Bank’s Association and CEO of state-owned Ziraat Bank. “Positive developments are happening on the deposit side in Turkey.”

Observers say there are good grounds for hope. Qatar has promised to invest some $15 billion in a range of projects in Turkey, at the same time agreeing a $3 billion currency swap agreement to alleviate pressure on the CBRT. And collapse in the value of the Lira will help curb consumption and demand for imports, helping the current account to move back towards surplus, eliminating one of the economy’s key imbalances.

“Turkish banks have a good record of managing and surviving crises. Even if there is a hard landing, it won’t be the first time that bankers have dealt with the problems that emerge” says Nomura’s Demir. “But they really need the support of policy-makers, and that means market-friendly policies that reassure investors and foreign banks.”

According to Paul Gamble, head of emerging Europe sovereign ratings at Fitch Ratings, Turkey’s sputtering growth will likely top out at 3.8% for fiscal 2018, and in 2019 will be around 1.2%. “If markets continue to be unhappy with the domestic policy trajectory, there will be more pressure on the lira and inflation,” he says.

But also points out that this sequence of events is not pre-ordained. Speaking in early September, he envisioned another scenario, in which the government would agree to a sharp rise in interest rates and engineer rapprochement with the US, bringing a welcome appreciation in the lira. A week later, the central bank delivered that sharp rate hike. Now all the remains is that rapprochement.